Putting Some Perspective on Income Inequality

A number of different campaign strategies have evidenced themselves during this presidential election cycle.  Among the Republicans, much, if not most of the campaigning has been focused on the need to undo everything President Obama has done, and to insult anyone who holds a different idea or who may have smaller hands than yourself.  For Hillary Clinton, her primary strategy has been one of touting her years of experience, while distancing herself from what she actually said and did during those years of experience. 

Bernie Sanders, on the other hand, has spent a great deal of his campaign energy on the issue of income inequality in America and its impact upon the middle and working classes of this country.   He has expressed a number of plans for the country, chief among which are implementing a single payer health care system, creating a massive infrastructure rebuilding program to put many Americans back to work in meaningful jobs, and creating a program whereby our young people could go to state colleges and universities, tuition free.

Many pundits and the Clinton campaign have gone out of their way to say that Sanders’ ideas are unworkable, and on the surface it is very clear that they would indeed be costly.  So, as a matter of gaining some perspective on this, it is illustrative to actually break down some numbers and see how some aspect of his ideas could be made to work.

In a recent campaign video from Bernie Sanders on the nature of income inequality in America, he pointed out that the wealthiest fifteen people in America have seen their wealth increase by a combined total of $170 billion dollars in just the past two years.  Let us come to a deeper understanding of that.

For starters, who are these people?  According to Forbes Magazine, the wealthiest people in America are, in order: Bill Gates (Microsoft), Warren Buffet (Berkshire Hathaway), Larry Ellison (Oracle), David & Charles Koch (energy interests), Christy, Jim, Alice and S. Robson Walton (Walmart), Michael Bloomberg, Jeff Bezos (Amazon), Mark Zuckerberg (Facebook), Sheldon Adelson (casino mogul), Larry Page and Sergey Brin (Google). 

Did they really see their wealth increase by $170 billion dollars?  According to Statista.com, yes they did.  We think of their increase in wealth, rather than in earnings, because “earnings” has the suggestion of wealth gained through work.  For people in this income bracket, their money comes from many sources, most of which are outside of what we would traditionally think of as “working for a living.”  Essentially, their net worth as reported in 2013 was set against their net worth in 2015 and the difference was a gain of $170 billion dollars.

Now, you might think that these people pay out a tremendous percentage of their net worth in taxes, but, according to Forbes Magazine, their Fortune 400 pay on average about 22.9% of their income to the IRS.  That is less than the income tax rate on a single person earning $38,250 per year (remember when Warren Buffet said that he pays less by percentage in taxes than his secretary?).

For the purposes of discussion, let us look at this in a different light altogether.  First, we’ll divide that $170 billion dollar figure in half and call it one year’s earnings, $85 billion dollars.  Then, let’s imagine that we are taxing that income at a rate of 90%.

If we taxed $85 billion dollars at a 90% rate, the tax collected would be $76.5 billion and the amount retained by the wealthiest fifteen people in America would be $8.5 billion.  Divide that evenly among the wealthiest fifteen and each would see a net increase in their earnings of just $565 million. That is quite a chunk of change, lost to the taxman.  How would the wealthiest fifteen survive?

Well, if Bill Gates or Alice Walton or Charles Koch were to go into full on panic mode, and determine that he or she might never be able to work again, that $565 million could be stashed in one of the safest investments going, a United States Government Treasury Note.  Now, these notes pay only a very modest return, but they are backed by the federal government and as safe an investment as you can get.  Currently, they have a yield of 4.625% interest per year.  So, if $565 million was stashed in your name in a Government T-Note, and you were to live on the interest from it, never adding another dime to your savings, what would you get per year?  The answer is $26 million, 131 thousand, 250 dollars per year, every year.

Could you eke it out on $26 million a year?

The first part of putting income inequality into perspective is this.  If we took from the fifteen wealthiest people in America 90% of their earnings and forced them to survive on the interest alone from the investing of the 10% left to them, they would each still earn more in a year than the overwhelming majority of Americans could dream of earning in a lifetime.

Now, what of that $76.5 billion in tax that was collected?

In a simple equation, let’s assume that every penny of it was to be spent on providing free college tuition to students attending public (rather than private) state colleges and universities.  In 2015, the average cost of tuition and fees to in-state students at public stage colleges and universities was $9,410 per year.  The cost for same to out of state students was $23,893.  If we divide the tax collected by the cost of the tuition, we get the number of students who could attend college, free of charge.  In this example, those “in-state” students would number 8 million, 129 thousand, 649. 

So, the second part of putting income inequality into perspective is this.  If we as a nation determined that it was in the best interests of the country to educate our young people as fully as possible, so that they might take on leadership roles in business, science, medicine, education, government and the arts (!), and through their leadership, better support the rest of us as we slip into middle and old age, we could send over eight million of them per year to college, tuition free, on the taxes levied against just fifteen people.

Think that a 90% tax bracket is too high?  Remember the lyric to George Harrison’s song from 1966, “Taxman”:

“Let me tell you how it will be, there’s one for you, nineteen for me”

One for you and nineteen for me (the Taxman), is a tax rate of 95%, what the Beatles were paying in England in the mid 1960’s.  AND THEY STILL GOT RICH!

In fact, in the United States, the wealthiest income bracket between the years 1944 and 1963, had a tax rate which vacillated between 90% and 92%.  And what was the cut-off point?  Two hundred thousand dollars.  So, if you earned $200,000 in 1960, your tax liability was $180,000 of it.  That would leave you with just $20,000, but in 1960, $20,000 was roughly four times what an average school teacher earned per year, and three times what your average NFL star earned.  In other words, you would still be very well off.

In 1964, that tax rate dropped to 77% (still on $200K and up) and then to 70% as a top tax rate on the $100K and up bracket from 1965 until 1981.  In 1981, the tax rate for the wealthiest Americans dropped to 50% and it has continued to decline until today, where it stands at 39.6%.  Of course, that tax rate is on W-2 reported earnings, not on dividends, and it is set against various write-offs and tax havens.  This is why Forbes reports that the wealthiest four hundred people in America only pay about 23% of their earnings in taxes.

In the illustration of what taxing the wealthiest members of our society would do to provide for free tuition to public colleges, we looked at just fifteen people.  Bernie Sanders refers to the top 1% of our income earners, a group of people who collectively earn more than the bottom 90% combined.  If we get our priorities straight and make the wealthiest people in America pay their FAIR share (and it need not be as much as 90%), they would still be rich beyond our wildest dreams, and our country would be able to provide for its citizens and our own future.

Disregard the rhetoric; look at the candidates’ records.  And by all means, do the math.  That is why we send you for a free public education.

The Richest People in America:

http://www.statista.com/statistics/201426/the-richest-people-in-america/

How Much the Richest People in America Make:

http://money.cnn.com/2015/12/31/news/economy/richest-americans/

Information on T-Bonds, T-Notes and T-Bills:

http://www.thesimpledollar.com/making-sense-of-treasury-securities-treasury-bills-notes-and-bonds/

Cost of a College Education:

http://www.collegedata.com/cs/content/content_payarticle_tmpl.jhtml?articleId=10064

Federal Tax Rates by Year:

http://taxfoundation.org/article/us-federal-individual-income-tax-rates-history-1913-2013-nominal-and-inflation-adjusted-brackets

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